All stocks, by their very nature, are speculative investments. To understand why, consider Facebook, Google and Netflix’s meteoric rise. It happened because these firms created a new type of asset that was largely poorly understood by most mainstream investors. Nothing illustrates this dynamic better than what happened after Uber went public in May 2019.
The Dangers of Speculation
Many business news and financial commentators stuck to the narrative that Uber was the first big tech company to go public that was not grossly overvalued, like Facebook and Google. The thinking was that neither Facebook nor Google could possibly be worth over a billion dollars, because they provided a free service that had no real tangible value. Uber and Netflix were supposedly insulated from this because their business models were based on user fees in exchange for actual services rendered. This turned out to be very flawed thinking.
Facebook and Google have exploded beyond their initial valuation because their earnings have exploded – the average North American Facebook user generates $100 per day in adverting revenue. Google’s ad revenues are not far off. Netflix does not collect advertising revenues, but this is not essential to understanding why it has succeeded.
What the mainstream investors failed to grasp was that Google, Facebook and Netflix’s prime assets were in the form of algorithms that had the power to hold user's attention. Under this new, re-visionary business model, they were selling the most highly tangible commodity of all – people’s attention. As the revenues point out, there is quite a high willingness to pay for this commodity. Unfortunately for those who invested in Uber, its revenues have remained relatively flat. The algorithms that power ride hailing services are easy to replicate, which has meant that there is no shortage of rivals for an ever dwindling sliver of Uber’s market share.
Heroes and Hindsight
People buy stocks because they believe that the share price will increase. Usually this happens when the company brings in more revenue than it did before. The problem is that it is difficult to predict what a company’s future revenues will be. No single, or group of, investors could have reasonably predicted that Uber’s algorithm would be easy to replicate, while the algorithms of the other tech companies would not be. Occasionally, greats like Warren Buffet fall victim to the perils of revenue speculating. His firm’s portfolio was heavily exposed to Kraft, Heinz and Budweiser because he believed that there would always be stable demand for hot dogs and cheap beer. Even Mr. Buffet’s six decade grasp of macro-economic trends was not enough for him to foresee the rise of veganism and craft beer displacing the status quo enjoyed by the incumbent food brands.
All That Glitters Is Gold
Instead of speculating on potential revenues for individual companies, consider gold bullion. Ten ounces of gold purchased in 2010 would have cost around $10,000. Today, thanks to the conservative monetary policies of the Federal Reserve, it would be just shy of $24,000. This is a far better return than the 14.7% annual average of the S&P 500. Gold tends to do well times of uncertainty. Nothing could be more akin to the destabilizing events of today.